Is it 'Liberation Day' or 'Liquidation Day'?
Macro assets are plummeting across the board, with the Nasdaq index having fallen nearly 25% from its peak, U.S. stocks down 4%, and the Hong Kong stock market plunging 9% this morning, showing signs of a modern-day 'Black Monday.' The trigger for this recent sell-off comes from China's retaliatory measures against the U.S. (such as rare earth export restrictions), yet no domestic stimulus measures have been introduced to offset the impact. China announced a 34% tariff on all U.S. imports starting April 10 and placed 11 American companies on the 'unreliable entity list,' along with other targeted countermeasures.
Is the current situation evolving into a competition of 'who can endure more pain without backing down'? Have all parties bet too deeply to exit easily?
U.S. stocks are heading towards the largest market value loss in history, with over $5 trillion evaporated in the past few days, and losses exceeding $10 trillion since the president's inauguration. This turmoil offers little refuge, as market concerns about the depreciation of the yuan intensify, with the USD/CNH sharply rising; Japanese government bond yields fell significantly by 20 basis points, marking a historic rebound; the U.S. bond market is beginning to price in 4.5 rate cuts before the end of this year (although Chair Powell has rebutted market expectations); and the market also anticipates that the European Central Bank will cut rates consecutively.
Investor reactions were as expected, with many selling off their long positions. Wall Street reports indicate that hedge funds are experiencing the most aggressive selling pressure and de-risking behavior in history. According to JPMorgan data, individual investors in the U.S. net sold over $1.5 billion in stock positions last Friday. From a market sentiment perspective, we may be transitioning from the stages of denial and anger to acceptance of reality.
Funding pressures are also beginning to spread, with Citigroup's 'Keyrate' indicator nearing a breach of pre-SVB crisis highs, and credit spreads starting to widen, as Japanese and European bank stocks plummeted over 10% last Friday.
So what should we focus on in this wave of sell-offs? Our fundamental stance is that this administration is one of the most coordinated executive teams in history, having clearly stated from the beginning that they want to 'reset' the globalization framework. We believe Wall Street has been reluctant to truly face and understand the determination of the Trump administration (just as they underestimated the Federal Reserve's rate hikes back in the day), and now they are finally starting to accept this new era of bilateral relations.
"Mr. President, my philosophy is that all foreigners want to take advantage of us, so our responsibility is to take advantage of them before they do."
-- John Connally, Secretary of the Treasury during the Nixon administration, 1971. Quote source: Yanis Varoufakis.
Younger readers in the crypto space might think this is the first time the U.S. government has acted so 'unreasonably' to intervene in the global order for its own advantage, but the reality is far from that. History has repeatedly shown that the U.S. is willing to disrupt traditional allies to expand its hegemonic position or endure short-term fiscal pain for long-term economic strength.
"An orderly disintegration of the global economy was a legitimate goal of the 1980s."
-- Paul Volcker, former Chairman of the Federal Reserve during the 1982 'Volcker Shock', when aggressive rate hikes by the Fed led to a recession. Quote source: Yanis Varoufakis.
Do you remember how the Federal Reserve aggressively raised interest rates, dragging the world into recession, indirectly leading to Japan's 'lost decade' in the 1990s?; or do you recall that Trump expressed strong dissatisfaction with the decline of U.S. manufacturing as early as the late 1980s when he published 'The Art of the Deal'?
"We are a debtor nation, and something will definitely happen in the next few years, because you cannot continuously lose $200 billion (the U.S. trade deficit at the time)."
In April 1988, Donald Trump stated on The Oprah Winfrey Show.
We firmly believe that the Trump administration is very serious about this reset; the so-called 'Trump put' has never been aimed at the stock market but rather at the U.S. bond market. The primary task is to lower long-term yields through economic slowdown and reduced DOGE expenditures, thus alleviating the refinancing burden on the U.S. government. Even before the Federal Reserve has clearly shifted to a dovish stance, the yield on 10-year U.S. Treasuries has already dropped by over 80 basis points. So far, everything is going according to script.
As the U.S. financing situation gets under control, the government can now take more aggressive geopolitical actions, weaken the dollar, and buy time to initiate a long process of relocating some manufacturing back to the U.S.
At this stage, the plan is in what is called the 'deterrence' phase; the focus is not on the actual scale of the trade deficit, but on Trump's use of tariffs to force countries back to the negotiation table one by one. We have already seen Vietnam, South Korea, and Japan seeking new bilateral trade arrangements with the Trump administration, and Trump is confident in his ability to gain structural advantages in one-on-one negotiations.
This has never been about the trade deficit. Everyone understands that the U.S. cannot complete the reshoring of industries tomorrow (and may never be able to), but the real core of all this is to negotiate more favorable terms under the new global order.
Meanwhile, the economic shock to trade partner countries will force their central banks to intervene by depreciating their currencies or implementing easing policies to support their economies, thus alleviating the inflationary pressure from U.S. import prices. As a condition for tariff removal, we expect the U.S. side to demand that key components must be manufactured in the U.S., allies need to purchase U.S. military exports, or increase allocations to long-term U.S. Treasuries as bargaining chips in negotiations.
As for those unfriendly trade partners, these tariffs can create additional revenue for the U.S. Treasury, further providing the U.S. with greater fiscal flexibility to maintain its tough negotiating stance.
Of course, none of this is without risk. The current government is essentially betting that they can depreciate the dollar while financing costs decrease, striking some balance with economic slowdown and controlled stagflation, without losing the dollar's global dominance. Economic pain is inevitable, but this is a gamble with an 18 to 24-month time horizon, hoping to bring structural advantages to the U.S. However, retaliatory actions from trade partners that cannot be anticipated will pose additional risks to this strategic framework.
This uncertainty is extremely challenging for the market.
Considering the aforementioned risk combinations, the Fed is unlikely to implement aggressive rate cuts or a new round of quantitative easing unless these policies align with the strategic actions and timing of the executive branch. This interdependency of policies is the reality we are in. Therefore, various signs indicate that the macro market has currently entered a 'bear market' mode, with selling on rallies, and investors will be forced to accept this long-term layout under the new structure and policy direction. This is actually akin to other countries advocating short-term suffering for long-term gains; the road ahead of us is destined to be challenging.
What about cryptocurrencies? For a brief moment, BTC seemed to decouple from the global market sell-off, managing to hold the critical level of $81k last Friday amidst a global stock market plunge, but this "decoupling" was short-lived.
Cryptocurrency prices ultimately 'corrected' back to the trajectory of the stock market. BTC fell below the $80k support level, dropping about 9% for the week, closing at $75k, while ETH plummeted by 18%. A wave of liquidations was triggered on Sunday when market liquidity was low, temporarily shelving any hopes regarding BTC's narrative as a 'store of value.'
From a long-term perspective, the technical picture may show that BTC has broken out relative to the global stock market, even having the potential to catch up with the performance of spot gold, but the market currently lacks clear catalysts, and risk management (i.e., further price declines) may continue to dominate the market until the global market stops crashing, though we don't know when that will be.
Currently, the negotiating positions of world leaders have strayed too far, leaving almost no room for possible de-escalation. Therefore, the market must strive for survival amid uncertainty and pain, which also means that the market is likely to continue to disrupt and shake investor confidence for some time.
If things continue to spiral out of control, and leaders of various countries escalate trade conflicts, causing asset prices to become innocent collateral damage, what should we do? If the situation worsens, who in the market can provide enough liquidity to rescue it? Interestingly, the legend seems far from finished...
This week looks like it will be very difficult to endure. Wishing all readers smooth operations, take care of your capital, and hold on through the volatility!